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Pandora Media reported its Q4 revenues just ahead of the market expectations but its profits failed to beat the estimates. And just before the earnings release, the New York Times reported that the Internet radio company is holding discussions to sell itself amid soaring losses, growing competition and waning investor confidence. Pandora reported revenues of $336 million for the quarter, which was $4 million ahead of the consensus estimates. Total listening hours hit 5.37 million, 3% higher than the year ago period. On the downside, total number of active users fell to 81.1 million in Q4 fiscal 2015 from 81.5 million in the same quarter last year. In Q4 fiscal 2014, the company had reported net earnings of $12.3 million but it reported net losses of $19.4 million this time around. Adjusted earnings per share came in at $0.04, three cents below the consensus estimates.Our current price estimate for Pandora stands at $19, implying a significant premium to the current market price. However, we are in the process of updating our model in light of the recent earnings release.

Though Pandora’s revenues have been increasing rapidly, it has been unable to control its content costs, which has kept it in a net loss position. Lately, investors have gotten highly critical about the company’s performance as they are not satisfied with Pandora’s plans to grow revenues faster than expenses. Under such a situation, it makes sense to take the company away from investors eyes and work on the growth plans without the pressure of meeting defined quarterly targets. However, what doesn’t make sense is why the management would want to sell the company now, when it’s just worth $2 billion on the market, as opposed to $7 billion about a year ago. If the management is indeed looking to sell the company, it is likely an after thought considering that investors have lost patience with Pandora’s continuous losses.

The New York Times reported that Pandora is working with Morgan Stanley to look for potential buyers, according to people close to the matter. However, they said that the talks were preliminary and may not lead to an immediate deal. Pandora’s biggest issue, which it has failed to resolve, has been its business model that is heavily reliant on advertisement. Moreover, the company has been facing tough competition from Spotify, which has kept a check on its advertisement and subscription revenues. Spotify, as a private company with better features and a larger music library than Pandora, Spotify has been gaining subscribers aggressively and attracting capital as well. In an attempt to bridge the gap on features, Pandora bought Rdio’s assets towards the end of last year. It even bought Ticketfly with the aim of diversifying its revenues sources. While the investor reaction was indifferent towards these acquisitions, we believe that they were valuable additions to the company.

Pandora cannot expect to sustain its business based on the advertisement model. It either needs to move towards a model largely reliant on subscription or add a different business segment or both. And this is what the company is trying to do. With Rdio’s features and some direct deals with music publishers, Pandora intends to provide users an added incentive to subscribe to its services. And with Ticketfly, it plans to enter a different business segment altogether. While the company is moving in the right direction, investors may be getting impatient, which is why it may be looking to go private.